by: Elaine Diane Taylor

Topics:

Jim Rickards

Economists tend to stay with models for too long. When dealing with capital markets Jim doesn’t use the economic models the elite have been using, and instead uses scientific theories like complexity theory.

Each financial crisis has been bigger than the one before and the Federal Reserve hasn’t brought their balance sheet back to normal after 2008. So what will happen at the next global crisis?

In the acute phase they won’t be able to print the money fast enough.

What will happen?

World money called Special Drawing Rights (SDRs), controlled by the International Monetary Fund (IMF) will happen, but it will take them some time to set it up.

So the financial elite will lock down the system and you won’t be able to get your money out while they set up the new SDR system.

It’s coming in the next crisis.

FINANCIAL ELITES

The elites of the international financial system are Christine LaGarde and David Lipton at the IMF, Mark Carney, former governor of the Bank of Canada, governor of the Bank of England and senior official for the Bank for International Settlements (BIS) in Switzerland, academics like Larry Summers at Harvard University, public intellectuals, and central bankers like Janet Yellen and Mario Draghi, for example, as well as heads of multi-lateral institutions like the Royal Bank and the IMF.

Jim has met many of the financial elites and worked side-by-side with Nobelists, Federal Reserve chairs and PhDs, and has enough first-hand experience to know how the system operates.

The elites are some of the smartest people you will ever meet, with IQs of 160 and 170, and they are like-minded individuals. All of these elites went to the same schools, like Oxford and Cambridge, MIT and Harvard. In many cases they are each others thesis advisors. They are highly educated but they are taught the same models, and the models don’t sync up with the real world.

The financial elite understand the system but they don’t understand the risk in the system because of the models they’re using. That’s what catches them off guard over and over again.

FINANCIAL CRISIS

Jim was involved with the Long Term Capital Management (LTCM) crisis in 1998 that almost brought down the world’’s banking system with derivatives, and that brought about the financial crisis in 2008.

Jim knows more about this monster than most because he was part of developing sovereign credit default swaps when he was at LTCM.

Those banking products are now thought to be toxic, but the products haven’t gone away, the models haven’t gone away, and the risk hasn’t gone away.

What’s happened is that the system that failed spectacularly with LTCM in 1998 is bigger and more dangerous today.

LTCM opened in 1994 with $4 billion in capital — the largest hedge fund opening up to that time.

By the time they reached 1997 they had gone up to $7 billion and had tripled their investors’ money. Then, in 1998 92% of the money was lost in a spectacular meltdown.

Jim was LTCM’s lawyer and he negotiated the bail out that prevented a systemic banking collapse.

They were hours away from closing every stock and bond market in the world.

Bob Rubin, Secretary of the Treasury at the time, and Alan Greenspan, then Chairman of the Federal Reserve, testified to this.

Jim was in the room with the Fed officials and Treasury officials, heads of all the largest banks and their lawyers and their representatives in some cases, and they negotiated a bail out. Wall Street put in $4 billion to prop up LTCM’s balance sheet and keep the banking system from collapsing.

They weren’t bailing out LTCM — they were bailing out themselves because LTCM owed the banks over $1 trillion in derivatives and agreements.

If the bail out had failed then Wall Street would have closed because they’d have been dumping $15 billion worth of stocks and $1 trillion worth of derivatives in a completely illiquid market. Lehman Brothers, always the weakest link, would have failed in a day in a sequential banking collapse.

Fast forward to 2008, and we were days away from a sequential collapse of every bank in the world. It was a larger and more dangerous than 1998.

What lessons were learned from 1998?

None.

In fact, policy did the opposite of what disaster would have taught you.

There’s been nothing put in place to stop these default swaps and special investment vehicles that can be hidden off balance sheet. They’re not used to the same extent at the moment because the industry got such a shock in 2008, but there’s nothing to stop them once people feel there’s a new boom and that there’s never going to be a crash again.

There’s a reason why nothing has been put in place.

Prominent central bankers retire and then write memoirs that speak the truth. Alan Greenspan was Fed Chair for 20 years and never said a kind thing about gold, but now talks about using gold as a monetary standard. Mervyn King was the Governor of the Bank of England and wrote about the risks in the system in his memoir.

Why don’t they do anything about it?

The bankers control the system.

HOW CAN WE FIX IT?

First, take deposit taking and loan making, and completely separate that part of banking from securities writing.

In the 1920s banks made garbage loans, securitized them, and then sold them to their own customers. That crashed spectacularly in 1929 and customers lost most of their savings.

Congress responded by splitting things up. A bank could either take deposits and make loans or else they could underwrite securities — but they could no longer do both.

It was called Glass-Steagall and it was the law until 1999, when the US Congress repealed it. Within ten years they crashed the system again.

That should have come as no surprise.

Secondly, they need to ban all derivatives except for exchange traded futures that are carefully margined using real underlying instruments used for hedging. That’s worked for 150 years.

Over-the-Counter derivatives should be completely banned. They serve no purpose other than to steal customers’ money and gamble.

The third step would be to break up the big banks.

JP Morgan used to be five banks and they should be again. That way any one can fail without taking down the whole system.

My thoughts…

People on the whole are getting angrier and more intense. Societies are redefining who they belong to and who they are aligning with. Verbal manipulation is becoming more overt. Irony is everywhere. Loudly pronouncing inclusiveness excludes those who don’t agree with just who is included in ‘everyone’. The ideas of global and national are being redefined and examined, and how we will share and divide up resources is being quietly worked out behind-the-scenes at the same time as it’s spilling over into the real world as the digital world develops.

This is causing another group to get more quiet and lay low. Don’t suppose that this means they agree with you, because silence is not agreement. Sometimes silence is a way of biding time. Sometimes silence is letting a champion do the speaking for you.

Life is not always moving and doing. The tortoise does not always win in the new world because winning is no longer a finish line and straight roads are not the fastest way to get where you’re going. Life does not move at a steady pace so don’t be concerned if you’re in a quiet phase.

The copybooks of the early 1900s gave us all the wisdom we need. The sayings that were copied are the truths, the gods, of our world. All the empires who followed the gods of the marketplace instead have fallen, and there’s terror and slaughter when the gods of the copybook headings return. The lyrics are by Rudyard Kipling. One of my gurus.

See the bankers wave their Wall Street wands and conjure piles of paper green. Naked short selling is like betting that your neighbour’s house will burn down. But in this scenario it happens to burn down. If the bankers win then we lose the whole world as we know it. I wrote this in 2009, with a lyric “A little grease (Greece) is floating out to sea, and little pigs (Portugal, Italy, Greece and Spain) are bobbing up and down, they’ll send a storm and we’ll see, when the tide goes out who’s naked on the beach“, and it’s coming on now. The world is changing as we know it.

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Nothing on this site is intended as individual investment advice. We’re all watching which way the wind is blowing.